Investment in electricity distribution capital infrastructure in South Africa: The role of regulation

Abstract

Background: The electricity distribution industry in South Africa is faced with numerous challenges that include distribution capacity shortages and backlog in investments. Aim: This study was carried out to investigate the role of regulation in enabling investment in distribution capital expenditure. Setting: The study focusses on the licensed electricity distributors and the energy regulation institution in South Africa. Methods: Primary data for the study was collected through interviews with 16 Energy Regulator officials responsible for analysing and approving electricity distributor tariff applications. Secondary data was collected and analysed through a sample of 112 electricity distributors in South Africa. Results: It is established that the National Energy Regulator of South Africa has put a number of processes and methods in place to ensure that electricity distributors (EDs) are efficient in their operations and that the tariffs they charge customers are not excessive and are aligned to specific benchmarks as approved by the regulator. However, a majority of EDs are not performing according to the benchmarks. For instance, they are operating at a negative surplus, which does not allow them to make sufficient investment in infrastructure refurbishment and acquire new infrastructure. The study also discovered that EDs are spending the minimum 6% required by regulation on repairs and maintenance. Conclusion: The conclusion of the study is that in the absence of a regulatory methodology that allows EDs to earn a required return on assets, benchmarks play a big role in ensuring that they are performing at the level required and that through the surpluses they generate, they can invest in the acquisition of new infrastructure for capital gain. However, regulation alone is not sufficient to ensure that capital investment is adequate; government intervention through infrastructure grants is also necessary and a private sector capital injection.